Empirical studies of variation in hospital costs fall into two camps: those based on analysis of the costs of individual patients and those – the vast majority – that analyse costs reported at the hospital level. In this review, we consider how patient-level and hospital-level data are related and outline approaches to analyzing them. The second part of the review considers general specification choices and methods of efficiency analysis. Moreover, we specify a model to be used in the empirical analyses of the EuroDRG project.